Market Failure
- Cecilie 🇩🇰
- 29. aug. 2016
- 2 min læsning
⭐️ Market failure is when the market alone cannot allocate the resources efficiently.
Most economists assume that the market mechanism is the most efficient way to distribute resources
Competition → lowest prices and best quality
Higher profits → new businesses → supply ↑ → prices → inefficient businesses go bankrupt.
Prerequisites for the market to function optimally:
Competition: Many small businesses that offer the product
Rational conduct: Consumers act rationally – they have access to all relevant information.
All costs are included in the price
If all three prerequisites are met we have perfect competition.
⭐️ Perfect competition is when buyer and seller have no influence on the market price. There are homogeneous products, perfect information and businesses only have the minimum profit needed to survive. Output is maximised and the price is minimised.
If you pay overprice you suffer from a welfare loss.
⭐️ Overprice is when the price is higher than it would have been under perfect competition. Overprice → welfare loss.
Reasons for market failure
There are four basic reasons:
⭐️ Market power
Monopolistic competition
Oligopoly
Duopoly
Monopoly
⭐️ Externalities
When the market does not take the effect that the economic activity has on others into account.
For example pollution – the municipality pay the external costs there are when purifying the environment.
⭐️ Public goods
Things that can be used by everyone in the society or no one at all. They have three characteristics: They are
Non-rival: The fact that one person uses the good does not stop another person from using it as well.
Non-excludable: It is impossible to stop people from using them when one person uses them.
Non-rejectable: You cannot choose to use the them even if you want to.
Examples:
Clean air
The judicial power
The fact that they are non-rival + non-excludable → it can be hard to to get people to pay for consuming them → they are not provided if left to the free market powers.
⭐️ Asymmetric information
Agents have different knowledge in areas relevant to the given situation